Leading growth stocks remain sluggish

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

A familiar refrain in these reports is the need to see a "volume-backed move in the averages," or "conviction on the part of large investors." A market can only go so far without signs that institutions are willing to be more than just bystanders.

It is this objective indication on a price/volume chart, something that is available for all to see, that usually accompanies the early and middle portions of a bull market.

If Monday's holiday-related volume did not qualify, Wednesday's did. Volume on the Nasdaq was 20% above normal, and NYSE turnover was 21% above. It was the second trend day in a row for the averages. Price went out a hair from the session high. Technically, it all lined up: range, volume, intraday tone, close.

If, as noted here, the seven-week advance has yet to produce many 20%-25% gains from the speculative-growth glamours — and this is the market's weakness at this point — many issues at least build bases. A market in which a large number of shares form basing patterns is a market that is most often poised for richer quotations.

Confirming elements exist in the form of outperformance by key segments such as emerging markets, small-capitalization and financials.

Among other secondary indicators, it is always a plus to see the brokers outperform the average stock. The first-quarter and late-summer market rallies featured outperformance by this group.

None of this says anything about the extent and duration of this seven-week advance in the averages. There are no crystal balls here. What it says is that, at this moment, the technical health is there. And that an intermediate-term speculator, a.k.a. a position trader, can buy leadership names, some of which have been discussed in this space in recent weeks.

The risk? Fallout from the looming fight in Washington over the statutory-debt limit. This brings with it a possible debt downgrade and short-lived default.

Among the names, Qihoo 360 Technology
QIHU, -0.43%
the Chinese software distribution concern, is one of the few that has broken out and moved up 20%+. The stock is extended at present, and does not offer an attractive entry.

The real burner right now in the growth sector is Three D Systems
DDD, -4.98%
Along with QIHU, it has moved up 20% post-breakout. DDD is extended and not suitable for entry at present. Worth watching.

Otherwise, to paraphrase Dr. Alexander Elder, trading is analogous to a three-legged stool in which all three legs need to be solid, or else the stool will fall. Strategy, money management and psychology (discipline) are the three legs. Though sometimes overlooked, money management is exceedingly important, and goes a long way toward dictating the level of success for a trader.

Psychology is another often-overlooked element in trading. Part of this deals with taking losses. Every strategy will have losses, and every successful trader takes them. Psychologically, how one handles a loss or a string of losses plays a significant role in the evolution of a trader.

As long as a trader understands that a) all successful traders take losses, b) a loss should never be taken personally, as the market does not know who you are, and c) each trade's result should be analyzed as part of a larger set of trades (30 is a reasonable number) and not in isolation, one has a good shot at overcoming the nemesis that foils many a participant.

In summation, the institutional investor this week begins to show conviction in its buying. From a volume (read: demand) standpoint, the vast majority of leading growth and building-related issues leave something to be desired. This may be a function of caution ahead of Friday's jobs number. Or it could be something more suspect. As a result, the position trader should be careful about picking his spots and should not feel in a rush to put capital to work.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

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